During chaos, sometimes it’s best just to take a breather.
And I’m going to show you why today.
In other words, don’t rush back in while you are still shaking from last week’s selloff. It’s a recipe for disaster.
The shock of last weeks moves will have you following the knee-jerk reaction of buying this dip.
Now, after the latest drop, stocks may very well be getting into oversold territory.
That doesn’t mean they can’t go lower.
And I have one sector that is trying to turn the corner for us to keep an eye on – the technology sector.
Watch This Level Closely
To get the relative view, we’ll be using my go-to charting tool, the Relative Rotation Graph (RRG).
If you want to understand how this unique charting system works, you can check out a YouTube video where I walked through the features of this chart. Click here to watch it now.
I really wanted to see how the market was reacting to the Federal Reserve induced selloff, relative to the S&P 500.
And I have a few key takeaways. One was utilities and healthcare turned higher slightly, while consumer staples continued to head in a direction to lead the market. These are the safe haven sectors that tend to outperform in volatile periods.
That’s exactly what we are starting to see.
But we’ll focus on one beaten down sector today, trying to make a swing higher.
RRG Sector Rotation
It is coming out of the lagging quadrant (bottom left) and heading northeast in the improving quadrant (top left). This is a great spot and signals the sector is on track to lead the market over the next couple of weeks.
One thing has to happen first though.
The bleeding has to stop.
The XLK has dropped 18% since mid-August, erasing the two-month summer rally and sitting right at a major support level.
Technology is Sitting on Major Support
This is not great news.
We would love to see a higher low. Not a potential double bottom at this stage in the bear market. It’s just not likely.
The sharp slide over the last several weeks tells me investors are going to try and buy this dip.
In fact, only three of the main S&P 500 sectors have closed below that June low – real estate, materials and industrials. Every other sector is holding above it for now.
Whether or not it holds across the board comes down to technology if you ask me.
This is the one, sitting right on that June low, that is pivotal.
If it fails, the rest of the sectors are going to flush below this level as well, and the whole market may roll over for several weeks.
And that’s why I think now’s a great time for a breather.
No need to rush and try to time a bottom the market at this exact moment. There are so many crucial levels to be keeping an eye on that, with just a little patience, will set up the next sharp run for the market.
I’m targeting more bearish opportunities this week, to play a continued slide.
But, whether or not this level holds is at the top of my list on how to trade it.
Regards,
Chad Shoop, CMT
Editor, Bank It or Tank It ELITE